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The dollar: Not so dead yet, after all

May 11, 2011 |  4:46 pm

Finally, the dollar is getting a bounce. But will it last?

The battered greenback rallied against a host of other currencies on Wednesday, reacting in part to renewed fears that Greece’s debt woes could trigger a new financial crisis in Europe.

The euro slid to $1.420, a six-week low and down 1.4% from $1.441 on Tuesday.

The DXY index (charted below), which measures the dollar’s value against the euro and five other major currencies, rose 0.9% to 75.31, its highest level since April 18. The index has rebounded 3.3% since reaching a 33-month low on April 29.

Dxy511 The buck’s revival, though modest, has been one factor slamming commodity prices over the last 10 days. A weak dollar had been good for silver, gold, oil and other raw materials by making them cheaper for foreign buyers who have the benefit of strong currencies.

The dollar has been hammered since August as the Federal Reserve has maintained an easy-money policy even as many other central banks have been raising interest rates to battle  inflation. Higher rates abroad tend to attract capital to foreign markets at the dollar’s expense.

What’s more, low rates in the U.S. have encouraged hedge funds and other global traders to borrow in dollars to invest abroad and in commodities. That trend also has put downward pressure on the buck.

But so many market players have been negative on the dollar that some analysts have warned that a rally seemed inevitable, just to test the resolve of the bears.

That’s what happened in November: The dollar had fallen sharply in September and October as the Fed signaled it would launch a new program to pump money into the financial system in an effort to suppress longer-term interest rates.

Once the Fed formally announced its $600-billion Treasury-bond-buying plan on Nov. 3, the dollar suddenly turned up. The DXY index rose 7% from Nov. 4 to Nov. 30 before resuming its decline.

The dollar’s latest bounce is less about what’s happening in the U.S. economy and financial system than about fresh jitters in Europe, said Alan Ruskin, a currency strategist at Deutsche Bank Securities in New York. The market “is more euro-negative than dollar-positive,” he said.

Greece still is sinking under a mountain of debt, despite a bailout a year ago by the European Union and the International Monetary Fund. Without more cash from the EU and IMF, Greece could be forced to default on its bonds -- an event that could wreak havoc in Europe’s financial system because many European commercial banks own Greek debt.

The euro has dropped 4.2% since reaching a 17-month high of $1.483 on May 2.

Meanwhile, the dollar also may be getting a lift from concerns about global economic growth, as China, India, Brazil and many other countries continue to tighten credit. If growth slows significantly investors might run back to the U.S. currency as a haven.

China on Wednesday said industrial production rose 13.4% in April from a year earlier, well below market expectations and another sign that tighter credit is having an effect on growth.

The Bank of England warned Wednesday that it might need to raise interest rates later this year to fight inflation, even though it said risks to the British economy are “skewed to the downside.”

The biggest question about growth centers on the U.S. economy, and what will happen when the Fed ends its bond-buying stimulus program on June 30. If the U.S. economy weakens, on the face of it that should be bad for the dollar -- unless global investors perceive that the net effect would be much worse for many foreign economies, triggering an exodus from those currencies in favor of the greenback as a place to hide.

-- Tom Petruno

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